Djibouti: Becoming a key player in Africa

With a population of a mere 875,000 and a GDP figure of $1.58 billion, the state of Djibouti rarely makes international headlines.

But things are changing.

Investment is soaring and political elections held on 8 April 2016 are garnering international attention. GDP is expected to increase by 6.5% in 2016 and remain steady at an average annual growth rate of 7% between 2017 and 2019.

Unlike other African countries, Djibouti lacks an abundance of natural resources but its strategic geographic location is potentially of great value. Adjacent to the Bab el-Mandeb strait—a gateway to the Suez Canal at the mouth of the Red Sea, and one of the busiest shipping lanes in the world—the state provides access to an array of key global markets and provides a major port for land-locked African nations, in particular for fast-growing Ethiopia.

In addition to its potential commercial value, its political value has not gone unnoticed and Djibouti is increasingly attracting investment for strategic military purposes. The state is home to the only American military base in Africa, and the United States is not alone. China has recently announced its first military base abroad, joining France and Japan in establishing a presence in Djibouti. China suggests that the new military base will help to support its existing anti-piracy patrols and will serve as a base for peacekeeping missions on the African continent, but the truth is that its value may go beyond that.

In light of Djibouti’s strategic value, significant investment in infrastructure is anticipated. Some studies estimate that approximately $9.5 billion in infrastructure projects are to be undertaken. These include the construction of a railway, more than 750km long to connect Addis Ababa, the Ethiopian capital to the Djibouti port. A new port is also under construction at Tadjourah, intended, amongst other things, to provide storage, logistics and export facilities for potash mining operations in neighbouring Ethiopia. There is also an additional $9.7 billion of proposals which remain unfunded.

The nation also has ambitious digital infrastructure plans—including seven submarine fibre-optic communication cables. The end goal is to make the nation the most important hub for connectivity in East Africa. It also has massive plans to exploit the strong ‘Khamsin winds’ and implement solar energy projects which could propel it to be the first country in Africa to be powered solely by renewable energy.

Funding for infrastructure is likely to come from China, with Djibouti keen to replicate the model which has been successfully used in Ethiopia. China is expected to provide more than $1bn at non-concessional rates for infrastructure projects, including a water pipeline. That said, Djibouti has no particular limitations which would preclude international investment, and therefore the possibility of obtaining international finance, particularly from development finance institutions, remains.

While investment in Djibouti is certainly a possibility, it is not without its challenges. Human rights violations and high unemployment continue to plague the country. Economists warn that the state’s public debt and its reliance on Chinese credit may hinder is potential. That said, its young population (over half under 24 years old) and the obvious competitive advantage of its geographic location makes it ‘one to watch’ in Africa.

The Inside Africa team would like to thank Samuel Burleton, Trainee Solicitor, for his contribution to this blog post.

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Africa is as dynamic a market as it is diverse. We understand that changes impacting your business can arise rapidly and vary significantly across the continent.

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